Obama wants to a “spendulus” of a trillion dollars, more than Bush
spent on the Iraq war in 6 years. How will he pay for this pork
filled package? They hope via T-bills bought by foreign investors.
However, the Chinese and Japanese investors currently have their own
problems so will have little appetite for such a huge infusion of T-
bills on the market. Consequently, they will be less valuable and so
will require a higher interest rate than congress expects. Even
worse, reports say that nearly 40% of Japanese investors worry that
the USA could default, with this huge pork package we can expect that
more than 50% of foreign investors will worry about USA defaults thus
lowering the bond rating of the USA to less than AAA and further
driving up the interest rates. This increased interest rate will
deepen the recession by making it very hard for business to borrow.
What options will they have then? I see two, inflation and raiding
your pension plans. If they drive inflation up to 10%, they can
reduce the effective real cost of the pork spending by 50% in 7.2
yrs. Furthermore, they will see your 401K and similar plans to be a
great source of revenue and may decide to legislate that a certain
fraction of these plans be invested in the new stimulus/pork t-bills
while “guaranteeing” a very low interest rate, probably lower than the
actual inflation rate.
So, the spendulus will not only deepen any recession but will slowly
reduce the value of any money you have in retirement accounts.